Triple and Quadruple Play Bundles of Communication Services

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1 Please cite this paper as: OECD (2015), Triple and Quadruple Play Bundles of Communication Services, OECD Science, Technology and Industry Policy Papers, No. 23, OECD Publishing, Paris. OECD Science, Technology and Industry Policy Papers No. 23 Triple and Quadruple Play Bundles of Communication Services OECD

2 TRIPLE AND QUADRUPLE PLAY BUNDLES OF COMMUNICATION SERVICES FOREWORD This report was presented to the Working Party on Communication, Infrastructures and Services Policy (CISP) in June It was made public by the Committee on Digital Economy Policy (CDEP) in April The report was prepared by Mr. Agustin Diaz-Pines and Ms. Alexia Gonzalez Fanfalone. Comments on STI s Working Papers are welcomed, and may be sent to the Directorate for Science, Technology and Innovation, OECD, 2 rue André-Pascal, Paris Cedex 16, France; sti.contact@oecd.org. Note to Delegations: This document is also available on OLIS under reference code: DSTI/ICCP/CISP(2014)1/FINAL OECD/OCDE, 2015 Note: The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. Applications for permission to reproduce or translate all or part of this material should be made to: OECD Publications, 2 rue André-Pascal, Paris, Cedex 16, France; rights@oecd.org

3 MAIN POINTS This report examines the provision of multiple communication services over broadband access networks, a phenomenon known as bundling. It highlights that care should be taken to ensure that such offers do not unreasonably constrain competition or bind consumers to a single provider in a manner that decreases welfare. Bundles of services have become more widespread in OECD countries as broadband speeds increase and, due to convergence over the Internet Protocol (IP), more services can be provided over those networks. Bundling allows operators to allocate fixed costs across a range of services and can have beneficial effects, such as the convenience of unified billing, new possibilities for innovation and discounts for consumers and business. Traditional telecommunication and cable television networks provided the first wave of bundled offers, which included triple-play services (telephony, data and pay-television services). This was followed by the emergence of quadruple-play offers, as wireless broadband networks enabled operators to add mobility to the previous services as well as a range of new services (e.g. navigation). The provision of bundled communication services can increase competition if it brings more choices, higher quality, or lower prices to consumers from the facilities-based networks providing bundled offers. On the other hand, it may also lead to increased consolidation between fixed and mobile network providers and result in less competition in wholesale and retail markets. This raises a variety of issues with respect to market structures, especially the marginalisation of some players either because they cannot offer some part of a bundle given that they lack access to networks or content, or because they cannot include all services in their bundled offers on reasonable and competitive terms. Communication regulators and competition authorities have been confronted with various challenges in their aim to apply conventional market definition and analysis to bundles of services. While bundling services may make economic sense for communication providers, economic literature provides evidence that bundles can be used to substantially limit competition: some market players may face constraints to replicate products and services if they do not have access to some important inputs that act as network bottlenecks or content (e.g. local loops, wireless access, competitive interconnection or the most popular television content, such as the rights to offer sports and movies). Standard practices for market analysis and definition should be applied to bundles and, if needed, to the imposition of remedies by regulators to tackle insufficient competition or by competition authorities to tackle anticompetitive conduct. Market definition processes should include a tool to control whether bundling products play a substantial role in a specific market and to what extent such role has implications for competition dynamics. In particular, the Small but Significant Non-transitory Increase in Prices (SSNIP) test (a form of the hypothetical monopolist test, a conventional tool to assess market definition from the demand perspective), should be fine-tuned to capture bundles of communication services. Communication bundles may, however, not have any significant effects on the obligations imposed, especially if those relate to wholesale markets only, as a proper wholesale market analysis could well deliver satisfactory results. The benchmarking of prices for communication services needs to take into account the practice of bundling. This is not because stakeholders can, as yet, ignore single-play offers that still play critical roles to meet the demands of some consumers, but rather because it is vital to be able to compare bundled offers on a like-to-like basis. While the adoption of communication bundles varies to a great extent across countries, the OECD basket methodologies could be adapted to include double-, triple- and quadruple-play OECD SCIENCE, TECHNOLOGY AND INDUSTRY POLICY PAPERS 2

4 bundles. Taking different elements from existing OECD baskets (fixed telephone, broadband and mobile baskets), this report constructs a set of proposed bundle baskets, which enable the benchmarking of prices across countries. In this document prices are compared for twelve large OECD economies: the prices of basic tripleplay bundles vary from USD 30 and USD 80 and those of premium triple-play bundles are between USD 50 and USD 195. Quadruple-play bundles, which include entry-level ( basic ) or unlimited ( premium ) mobile services can be purchased from USD 35 to USD 120 ( basic ) or from USD 80 to USD 250 ( premium ). In addition to improved service provision of broadband Internet access, pay-television, telephony and mobile communications, fixed broadband operators are starting to include innovative services in their bundles, either at no extra fee or optionally involving a subscription costs. The report looks at innovative bundles of services, such as those resulting from partnerships with over-the-top (OTT) providers (e.g. Spotify, Netflix, Deezer) as well as those in the areas of home monitoring, e-learning applications, computer security, and cloud storage services. An alternative, or rather complementary approach, for comparing the prices of communication bundles is the use of hedonic price analysis. Given the inherent complexity of this analysis, future work will provide an assessment of the advantages and challenges of hedonic price analysis, and for this reason it has not been included in this report. 3 OECD SCIENCE, TECHNOLOGY AND INDUSTRY POLICY PAPERS

5 TABLE OF CONTENTS MAIN POINTS... 1 INTRODUCTION... 5 SECTION 1: IMPLICATIONS OF COMMUNICATION BUNDLES FOR COMPETITION... 7 Anti-competitive behaviour based on bundling... 8 A pre-condition for assessing anti-competitive behaviour: a correct market definition for bundles Implications on wholesale market definition if the retail market is a bundle Positive economic implications of service bundles SECTION 2: PRICING OF TRIPLE- AND QUADRUPLE-PLAY BUNDLES Overview of market structures in OECD countries Bundles including broadband services Application of the OECD price basket methodologies to bundles prices Double-play bundles Triple-play bundles The cost of upgrading Triple-play bundles including mobile services Quadruple-play bundles Hedonic price analysis of broadband bundles SECTION 3: INNOVATIVE SERVICES INCLUDED IN TRIPLE- AND QUADRUPLE-PLAY BUNDLES Video features, computer security and parental control Enhanced connectivity features: cloud services and Wi-Fi Over-the-top applications Home management services E-learning applications E-health, banking, payment and other services Way forward for innovative services in communication bundles GLOSSARY ANNEX REFERENCES OECD SCIENCE, TECHNOLOGY AND INDUSTRY POLICY PAPERS 4

6 INTRODUCTION Although bundling of several communication services has been common, for many years, such as when incumbents offered network access and services as part of a package, market liberalisation and technological convergence have played a key role in increasing the range of services offered in these bundles (OECD, 2014). Multi-purpose IP-based networks have enabled the provision of different services over the same network. For example, services such as telephony, video, data, which were previously provided by separate networks (e.g. PSTN, cable networks, dedicated corporate links), can now be provided by the same platform. In the case of pay-television services, satellite technology (Direct Broadcast Satellite, DBS, or Direct-to-home, DTH) remains an important platform. Bundling is not straightforward to define. Some authors define bundling as selling goods in packages or selling two or more separate products in one package (Adams and Yellen, 1976; Stremersch and Tellis, 2002), whereby the term separate may have different implications and products is understood to refer to both goods and services. More generally, economic literature uses pure bundling or tying for the sale of two or more goods or services jointly, without the possibility of purchasing the products independently, whereas mixed bundling allows the purchase of the independent products separately. Under unbundling, firms sell only the products separately, not in a bundle. For this report, which focuses on communication services, the term bundle of services will be used when two or more services can be purchased jointly (at one joint price), or separately, but a discount is provided if two or more services are acquired. These services may or may not be technically integrated (e.g. unified billing, technical convergence). Triple-play services refer to bundles of fixed voice, broadband and pay-television services, and quadruple-play services to triple-play bundles plus mobile services, whether mobile voice, data or both. As a result, most OECD countries have witnessed a trend in which technological convergence has encouraged competition between services and platforms. The latter translates into commercial offers based on bundles, and consequently these offers have become pervasive. For example, nearly half of households in the European Union purchase communications services as part of a bundle (46%), and in particular, Internet access purchased through a bundled offer represents 64% of all Internet connections in the EU (European Commission, 2014). The pervasiveness of triple play bundles has increased, and in particular, the bundle broadband-fixed telephony-pay television has become increasingly popular: it was purchased by 4% of European households in 2007 and grew threefold by 2013 (i.e. 8% in 2009 and then up to 12% in January 2013). By way of example, the proportion of households in the United Kingdom that purchased bundles grew from 29% in 2005 to 53% in 2011 (and the triple-play bundle mentioned above grew from 9% to 24%). This report undertakes a survey of operators that provide triple- and quadruple-play services. The number of operators providing quadruple-play bundles is significantly lower than for triple-play, which also reflects that the starting point for this comparison is the broadband component. The results may have varied if mobile operators had been considered first, following with an examination of which of them also provide fixed services. Thus, as bundles become ubiquitous, they play an essential role in the dynamics of telecommunication markets. The effects of bundles on competition dynamics in communication services has already been addressed in previous OECD work (OECD 2006, OECD 2011 and OECD 2013a). On the one hand, bundling can be pro-competitive if it enhances consumer choice, but on the other hand, it may raise competition concerns to the detriment of consumers. In addition, bundling allows pricing discounts that reflect that fixed costs such as network provision or customer care can be shared across multiple services. In broad terms, policy makers should seek to foster competition in bundled services, for example by 5 OECD SCIENCE, TECHNOLOGY AND INDUSTRY POLICY PAPERS

7 increasing bill transparency, by avoiding consumer lock-in and by preventing that large operators use these bundled sales to leverage their market power (OECD, 2013a). The first section of this report provides a set of indications on how regulators and competition authorities should take into account bundles to improve market definition and analysis processes. In particular, they should assess whether bundles should be considered a relevant market and to what extent. The latter translates into examining whether different remedies in the absence of sufficient competition should be implemented or, alternatively, whether wholesale remedies need not change. This report also contains a methodology proposal to include communication bundles in the broader OECD price benchmarking methodologies, used since the 1990s to compare prices of communication services across countries (Section 2). These baskets rely on empirical evidence from regulators and, especially, communication operators about what services are actually being demanded and consumed by consumers and businesses. Given the intrinsic challenges of reaching an agreement on standardised bundles of communication services that can be compared across countries, this report puts forward a proposal and tests it with actual data from 38 operators in the twelve largest OECD economies: Australia, Canada, France, Germany, Italy, Japan, Korea, Mexico, Netherlands, Spain, the United Kingdom and the United States. This exercise relies to a significant extent on existing OECD communication price baskets and proposes a way to combine the different services to form triple- and quadruple-play bundles. The report also includes Section 3 on innovative services that communication providers are increasingly including in the bundles they provide, such as enhanced hardware devices, home security services or various over-the-top applications, either provided by the operator or in partnership with thirdparty providers. These developments show that bundles may be used to promote innovative services and create new business opportunities and value for consumers. Various workshops have been organised by the OECD, in addition to the regular work on communication indicators, in order to develop a wide set of indicators on broadband infrastructure and services (Washington, D.C., October 2011, London, June 2012). One of the recommendations suggested by the participants to these workshops was to undertake exploratory work on the appropriateness of using hedonic price regression analysis to understand trends in broadband pricing. These recommendations already anticipated that the use of hedonic economic models would rather complement the benchmarking role of the OECD baskets, rather than put forward an alternative approach. In this sense, a future OECD report on hedonic price analysis will complement the basket analysis of communication bundles included in Section 2. OECD SCIENCE, TECHNOLOGY AND INDUSTRY POLICY PAPERS 6

8 SECTION 1: IMPLICATIONS OF COMMUNICATION BUNDLES FOR COMPETITION Consumers can benefit from bundles to the extent it allows them to purchase several services with a significant discount over the sum of prices for stand-alone equivalents (OECD 2011, OECD 2006). In addition, bundles may reduce complexity (e.g. in France the triple-play bundle is the standard service, complemented by à la carte options) or, on the contrary, may complicate choices for consumers by increasing complexity, thus making price comparison more difficult, and reducing bill transparency. In competitive markets, operators may try to attract customers by simplifying the plans advertised. Other benefits for consumers may arise from the integration of services and the possibility to use one service in many devices. Since consumer bills may also become more complex and less understandable, some policy makers and regulators have sought to increase bill transparency by issuing regulation that requires operators to disaggregate the prices of each service component in the bundle. Likewise, when operators sell mobile devices and communication services as a package, some regulators force operators to make explicit the amount of the bill that corresponds to the handset (e.g. Canada). These practices are in line with what is set out in the OECD Consumer Toolkit and its application to communication services (OECD, 2008; OECD, 2010; OECD, 2013b). In 2010, the Body of European Regulators of Electronic Communications (BEREC) invited regulators to ensure that consumers of bundled services can switch providers with ease (BEREC, 2010a). From an operators point of view, there may be an incentive to provide bundled services if it involves cost savings, such as the use of a sole technology platform (i.e. a high share of costs are fixed). Bundling services can also facilitate price discrimination. Cost savings may arise via economies of scope and scale or simplified distribution and marketing. An example of cost savings are set-top-boxes, continuing with the example of France, where providers offer triple play bundles over the same device (OECD, 2011). With regards to price discrimination, traditional economic literature sustains that operators bundle services together as it allows incumbents to recuperate consumer surplus without lowering prices too much (McAfee, McMillan, and Whinston 1989). Bundling can also reduce the variation in consumers willingness to pay, hence facilitating price setting (Crawford, 2008). Bundles could also reduce consumer choices because, as in the case of pure bundling or tying, bundled packages may include one or more services which the consumers may not value. For example, some operators may tie broadband to fixed telephony which increases switching costs for consumers. Regulators may seek to reduce this type of tying with the aim of fostering competition. In any case, bundles are becoming increasingly popular in most OECD countries as many operators discourage the purchase of standalone services by pricing bundles in more advantageous terms. In addition, the provision of standalone broadband may become important for those customers who wish to subscribe to over-the-top (OTT) services. This becomes crucial in countries or geographic areas in a country where competition is limited (e.g. only served by one or two Internet Service Providers (ISPs). In this case, OTT services may play a role in offering other services such as voice and video, in which case standalone broadband would play an important role to increase competition (OECD, 2011). Of course, as highlighted in many recent policy debates, the quality of broadband connections (e.g. speeds, latency) remains crucial for these OTT services to become viable options for consumers and thus enhance competition. 7 OECD SCIENCE, TECHNOLOGY AND INDUSTRY POLICY PAPERS

9 A list of specific policy recommendations to increase bill transparency, reduce switching costs and foster competition in bundles has already been covered in an OECD report on broadband bundling (OECD, 2011). The next section focuses on competition concerns recently raised by regulatory and competition authorities and provides an overview of the main challenges faced when defining relevant markets in the presence of communication bundles. Anti-competitive behaviour based on bundling Operators may use bundles to leverage market power or increase switching costs for consumers. In addition, bundles may mitigate the ability to compete for rivals offering standalone services only (OECD, 2011). Nalebuff (2004) points out that bundling can be an effective entry deterrent if the rival sells only the standalone good (compared to the bundled offer by the incumbent). Thus, if most users buy triple play bundles, entry may depend on the ability of new competitors to provide these packages, where access to all relevant wholesale inputs (e.g. television content, local loop, airtime for mobile services) becomes vital for successful retail competition. Rey and Tirole (2006) say that firms may choose to bundle a competitive final good with a bottleneck good (i.e. the standalone good where the firm dominates the market) to engage in horizontal foreclosure. 1 In this sense, this behaviour can be considered predatory because, even if it involves offering the bundle at a discount and lowering current profits, the firm is seeking to lower competitor s profitability so it eventually exits the market, taking advantage of its dominant position in one market ( the bottleneck good ). Furthermore, operators may artificially alter prices charged for each of the stand-alone services (e.g. by selling them below average costs), which may lead to price squeeze or lack of replicability of the bundled offers by potential competitors. In addition, vertical foreclosure (i.e. denying competitors full access to a bottleneck input, as defined by Rey and Tirole, 2006), could also arise if alternative service providers cannot access all wholesale inputs necessary to deliver the bundled service. In this sense, the owner of the inputs (e.g. television content, local loop, mobile airtime, etc.) would be in a position to defend its market power over adjacent service markets. Thus, in order to secure a level playing field in telecommunication markets, it is essential that enough competitors have access to wholesale inputs in order to provide bundled offers to end-users. In this sense, the Danish regulator, the Danish Business Authority (DBA), in the context of its decision concerning regulation of the market for wholesale broadband access (WBA) in December 2008, defined the market of WBA not only as bitstream access via copper networks, but also as including fibre and cable television networks. The significance of this decision was that it justified additional obligations while examining bitstream remedies, such as multicasting, which would allow rivals to replicate the bundled retail offers of the incumbent. 2 Many European communication regulators have expressed concerns about the lack of replicability of bundles by all players. In fact, the European Regulators Group (ERG) document on the replicability of bundles (ERG, 2009a) already mentioned that video content and services were the main elements raising doubts about the replicability of these packages (55.6% and 44.4 % respectively). 3 In 2007, Oxera prepared a report for the Irish regulator Comreg, which included a decision framework for regulators to assess whether bundles would be replicable through retail-minus wholesale inputs (Oxera, 2007). In addition, the BEREC report on the impact of bundled offers on retail and wholesale market definition (2010) mentions that regulators consider that the most likely source of competitive distortion in bundles is when rivals don t have access to television content and are thus unable to offer triple play (BEREC, 2010b). For example, some competition authorities and regulators in OECD countries (e.g. France, United Kingdom and the OECD SCIENCE, TECHNOLOGY AND INDUSTRY POLICY PAPERS 8

10 United States) have recognised the importance of access to television content as an input in order to foster competition (see Box 1). France Box 1. Access to television content as a competition bottleneck In 2012, the French Competition Authority (AdC - Autorité de la Concurrence) re-issued the CanalPlus/TPS merger decision; following the withdrawal of the 2006 merger authorisation for lack of compliance with the conditions imposed. Among the obligations imposed in 2012, CanalPlus had to provide a wholesale reference offer so that rival platforms could access its content (i.e. must offer obligations). In addition, CanalPlus was obliged to include up to 55% of independent channels in its offers (i.e. must carry obligations). 4 Another case that attracted much attention from French authorities was the entry of Orange to content for paytelevision in 2008 (seeking upstream integration). In 2009, the French Competition Authority strongly advised against allowing Orange to offer its sports channels (i.e. Orange sports) only to its broadband customers (Autorité de la Concurrence, 2009). The French Competition Authority was concerned that this double exclusivity (i.e. exclusive access and distribution of content) by Orange would, despite introducing competition in the pay-tv market, seriously undermine the currently competitive broadband market (and the future fibre broadband market). This case was brought to court, and in 2010, the Tribunal de Commerce of Paris ruled that Orange should not be allowed to tie Orange sports to its triple-play offer, as it represented disloyal competition. 5 After several appeals, the highest court for this matter (Cour de Cassation) vacated this decision and allowed Orange to keep its double exclusivity. 6 United Kingdom In 2012 the Competition Commission of the United Kingdom, while analysing the effect of Sky Movies on the paytelevision market, concluded that the fact that Sky had the first window to major Hollywood movies was not a sufficient driver of consumer s choice as to harm competition. The main reasoning behind it was that the launch of improved OTT services by Online Video Distributors (OVD), like Netflix and LOVEFiLM, offered viable alternatives that drove consumer s choice increasing competition. In contrast, in the case of Sky Sports, the communication regulator Ofcom imposed in 2010 a must-offer wholesale obligation on Sky, meaning that it had to offer these sports channels to retailers on non-sky platforms. 7 United States In 2011, extensive conditions were imposed on Comcast/NBCU when these companies merged, by the Federal Communications Commission (FCC) and the Department of Justice (DOJ). Comcast, the largest cable-television and broadband provider in the United States, merged with NBCU, owner of broadcast television stations (NBC), cable programming and movie content (Universal Pictures, Focus Features) and has a share in Hulu, a popular video OTT. The authorities imposed non-discrimination obligations against non-affiliated pay-television providers, must-carry obligations and limits on exclusive dealing. Some of these conditions also affect video OTTs (online video providers), which highlight the importance of OTT providers for increased competition in video markets. 8 As bundles become more and more common, assessing the effects they have on competition becomes increasingly challenging and important for regulators and competition authorities. Some countries have already tried to provide a roadmap on how to assess bundles from a competitive stance. For example, the Australian Competition Commission (ACCC) established in 2003 decided that, when assessing bundles, it would first consider whether the bundle in question involves leveraging market power from competitive to non-competitive markets, or increases barriers to entry. Second, it would consider whether bundles enable predatory pricing or price squeeze (ACCC, 2003). Similarly, BEREC (ERG Report on the application of margin squeeze tests to bundles, 2009) firstly concurred that bundling might be used by a vertically integrated operator with significant market power (SMP) in an input market to leverage its power into one or several downstream markets (ERG, 2009b). BEREC underlined that assessing this type of anti-competitive behaviour would also require a vast amount of detailed information on the costs of providing the bundled offer. For example, in Australia in 2003 the 9 OECD SCIENCE, TECHNOLOGY AND INDUSTRY POLICY PAPERS

11 ACCC required the incumbent operator Telstra to provide information about the total number of customers on each specific bundle, including the implicit discount offered (OECD, 2014). Whether OTT services, especially video, may eventually become part of an existing relevant market (e.g. pay-television market, triple-play services market), this will depend on their current or future role as substitutes for traditional services, which can be tested through the hypothetical monopolist. While the degree of substitution can vary across markets or services, some countries already see OTT services as an important source of competition which should be promoted (e.g. the United States). The assessment of these anti-competitive behaviours requires, in any event, that the relevant market be delineated. The definition of relevant markets in the presence of bundles is already, in itself, a rather challenging task. Not only do authorities require access to extensive, reliable and high quality information, but also, authorities may face methodological challenges compared to market definition of standalone communication services. A pre-condition for assessing anti-competitive behaviour: a correct market definition for bundles Market definition bears consequences on which telecommunications operators are deemed dominant and thus subject to ex ante regulation. As bundles become increasingly more common, the challenge for both regulators and competition authorities becomes more important. As market power in a standalone service does not automatically imply dominance in the provision of a bundled offer and vice-versa, certain behaviours may raise competitive concerns depending on how the relevant market is defined. In addition, depending on market definition, a certain merger may or may not be considered to lessen competition (Pereira et al, 2013). The conclusion reached on market delineation could vary depending on the standalone service used as a starting point for the market definition assessment, or on whether the focal point is the bundle itself (BEREC, 2010b). This may, of course, have an effect on ex ante regulation. In looking at market definition, it is worth remembering that is not an end in itself; rather it is a means to identify the products/services that act as competitive constraints on the focal product in question. Thus, the question becomes whether market definition should continue to address standalone services (e.g. telephony, Internet access or television) or whether, in some cases, bundles may become the relevant market (Pereira et al., 2013). As more users purchase bundled offers, it may make sense to define the bundle as a relevant market. The European Commission s Explanatory Note accompanying the Recommendation on Relevant Markets (2007) mentions that consumers may have a preference for a bundle if there are significant transactional costs. In this case, consumers may prefer to purchase the services as a bundle and from a single supplier. Hence the bundle may become the relevant product market (European Commission, 2007). In its 2014 Explanatory note, the European Commission further noted that what is important in this respect is that NRAs are able to ensure that the vertically integrated SMP operator's regulated elements of the bundle can be effectively replicated (in terms of both technical and economic replicability) at the retail level, without an implicit extension of regulation to other components which are available under competitive conditions (European Commission, 2014). However, as BEREC rightfully states, the presence of a separate market for service bundles does not necessarily indicate that there is no competitive concern within the individual components of the bundle (BEREC, 2010b, ComReg, 2012). How to technically define markets when dealing with bundles becomes a challenge. To this end, the BEREC report on the Impact of Bundled Offers in Retail and Wholesale Market Definition (2010) provided regulators with a list of elements to take into account when considering that a given market should be defined as a bundle, such as economies of scope, transaction cost savings, the take-up of bundles in comparison to standalone products, among others. The Irish Communications Regulator (ComReg) used these general principles in 2012 when defining markets of fixed voice access (ComReg, 2012). OECD SCIENCE, TECHNOLOGY AND INDUSTRY POLICY PAPERS 10

12 The underlying difficulty with regards to market definition of bundles is to find out whether observed bundle prices are competitive (i.e. to disentangle whether they are a result of economies of scope or a result of leverage, as mentioned in BEREC, 2010b). This proves difficult to ascertain, as it becomes extremely arbitrary to assign costs to specific elements of the bundle, as most infrastructure elements are used by all the services. Although the definition of relevant markets in telecommunication at a standalone level prevails today, some regulatory and competition authorities have already used or acknowledged bundles in market definitions (see Box 2). United States (1996) Box 2. Cases where bundles have been used in market definition and analysis A precedent of using a type of bundle as the relevant market dates back to 1996 in the United States, where the NYNEX/Bell Atlantic merger decision acknowledged that the local exchange, exchange access and long distance markets constitute a bundle of long distance and local calls on the grounds that users faced competitive alternatives to this bundle (Gual, 2004). 9 Netherlands (2005) In 2005, the Netherlands regulatory authority, OPTA, ruled that mobile data such as SMS, WAP and MMS belonged to the same relevant market as access and call origination on the grounds that these services were virtually always bought as a bundle. Chile (2008) In 2008, the Chilean competition authority (Fiscalía Nacional Económica, FNE) noted, in a case about predatory pricing (operators Telsur vs. VTR), that the triple play bundle of local telephony-television-broadband may constitute a separate market. Nevertheless, it also stated that the individual markets should continue to be analysed as operators can leverage their market power through bundles. 10 United Kingdom (2010) In 2010, Ofcom, under the review of wholesale broadband market, acknowledged that broadband services sold as a bundle are part of the same retail market of standalone broadband. 11 Portugal (2013) More recently, a relevant example where a triple-play bundle has been defined as the relevant market is the merger analysis of the two major telecommunications operators conducted by the Portuguese Competition Authority in 2013 (OECD, 2014). 12 One of the conventional tools used to delineate markets from the demand point of view is assessing whether consumers would be willing to substitute a service in response to a small but significant nontransitory increase in price (SSNIP test) of the service considered (usually between 5% and 10%). The relevant product market would be that over which a hypothetical monopolist could profitably maintain a SSNIP above the competitive price level. The European Commission s Explanatory Note accompanying the Recommendation on Relevant Markets (2007) states with regards to bundles the following: If, in the presence of a small but significant non-transitory increase in price [SSNIP] there is evidence that a sufficient number of customers would unpick the bundle and obtain the service elements of the bundle separately, then it can be concluded that the service elements constitute the relevant markets in their own right and not the bundle (European Commission, 2007). This view has been reinstated in the newly released recommendation on relevant markets (European Commission, 2014), which acknowledges the increasing demand for packages of services. The 2014 Explanatory Note also recommended ensuring the effective replicability at the retail level, without an explicit extension of regulation to currently unregulated inputs. 11 OECD SCIENCE, TECHNOLOGY AND INDUSTRY POLICY PAPERS

13 The fact that enough operators can have access to all the wholesale elements of the bundle should also be taken into account in market definition; otherwise some operators may leverage their market power into the adjacent service markets part of the bundle (OECD, 2014). This would have an effect on the prices that are observed in the market, which may indeed not be reflecting competitive prices. Thus, the first issue with regards to the SSNIP test is the notion of competitive prices in a bundle. If the SSNIP test is applied to a situation where current prices are above the competitive price benchmark, and if, as commonly is the case, price elasticities increase with the price, then the test is run at a higher starting point elasticity (Gual, 2004). As a consequence the SSNIP test would incorrectly lead to establishing broader markets as even small price increases will result in significant substitution (also known as the cellophane fallacy ). In this sense, BEREC (2010b) emphasises that when considering the definition of bundled markets, it is important for National Regulatory Authorities (NRAs) to consider whether bundling would occur under competitive conditions, or whether it is likely to be the result of the behaviour of a firm with market power. The main issue here is then to identify the prices that would be expected under competitive conditions. If bundles are being used to leverage market power, the observed prices may be not an adequate proxy of competitive prices. BEREC s 2010 report also analysed the limitations of using the SSNIP test to identify relevant markets in the context of communication service bundles. It recommended that regulators should take into account other indicators when defining relevant markets, including economies of scope and transaction costs linked to bundles. Nevertheless, Pereira et al (2013), in their study of triple-play bundles in Portugal, argued that despite the difficulties with bundles, SSNIP tests can still be used to define relevant markets as bundles. One of the difficulties that the authors point to is that SSNIP tests require to establish determining substitutability between products of the same type and also the substitutability between products of different types, so when assessing the market of triple-play bundles, the substitutability vis-àvis double play bundles and standalone services also should be determined. To this end, the authors used of data from service plans of six Portuguese operators (which 99% of triple-play bundled offers in that country) in order to delineate communication markets for bundles in Portugal using three forms of the SSNIP test (i.e. UPI, EPI and UPP). 13 They found, according to all versions performed of the test, that triple-play bundles represent a relevant product market (Pereira et al, 2013). Implications on wholesale market definition if the retail market is a bundle Authorities should carefully analyse the impact of defining retail markets as a bundle and the consequences it bears on wholesale market definition, as wholesale services are in fact derived demands of downstream services. As Pereira et al (2013) point out: if the bundle of communication services constitutes the relevant market at the retail level, then it may be appropriate to define wholesale markets as bundles, too. The latter bears important policy implications because most regulatory proceedings in the EU usually only regulate wholesale markets and it would require re-examining which wholesale markets are susceptible to ex ante regulation (Pereira et al., 2013). In fact, BEREC (2010b) recognises that the definition of a bundle market at a retail level may be appropriate in some situations, and in such cases the wholesale market definition may be affected as well. For instance, this report mentions that retail economies of scope may be the result of economies of scope at the wholesale level that are passed downstream. In such cases, it may be appropriate to also define wholesale markets as bundles. In short, if the factors that result in defining the retail market as a bundle can also be observed at the wholesale level, it would be possible to define wholesale markets as bundles. If that is the case, BEREC underscores that the test for determining whether ex-ante regulation is warranted should be applied to the newly defined markets (three-criteria test). However, the Irish Communications Regulator (2012) pointed out that bundles at the retail level may have no impact at the wholesale level as wholesale inputs may still be handled on a standalone basis (ComReg, 2012). Similar to this view, in 2010 OECD SCIENCE, TECHNOLOGY AND INDUSTRY POLICY PAPERS 12

14 Ofcom (United Kingdom), in the context of the wholesale broadband market review, considered that the presence of retail bundles should not affect the definition of the wholesale market. Thus it may still make sense to define wholesale markets as individual markets. Of course, this question still remains open as it will greatly depend on how communication markets and competition dynamics surrounding bundles evolve in the coming years, but was confirmed in Ofcom s 2014 review of wholesale broadband access (Ofcom, 2014). Positive economic implications of service bundles Section 3 of this report focuses on a key positive implication of communication bundles: the possibility for operators to offer innovative services in order to attract and keep customers. In this vein, operators may be choosing to test more innovative products and services as part of a bundle, while they would not do so, or would be facing higher risks, if they were standalone services. Moreover, in the case of mixed bundling, operators tend to make bundle prices attractive to customers and thus apply a discount over the sum of the prices of standalone services. Customers with bundles also gain significant benefits from unified billing from a single communication service provider, even though this comes at significantly lower churn rates, which could sometimes be an indication of higher barriers to switching, which could eventually harm competition. More generally, firms bundle or tie products following a number of rationales, some of which are not necessarily anticompetitive. Understandably, policy makers and regulators have sought a broader understanding of why firms bundle in order to counter anti-competitive behaviour. For example, it makes sense purchasing two shoes jointly in a pair or ordering a full dinner in a restaurant. The economic literature points at various examples where bundling makes economic sense. For example, Evans and Salinger (2004) conclude that consumers pay much less for tablets with multiple ingredients than they would do if buying tablets with each ingredient separately. 14 They argue that the use of bundling and tying under competition relies heavily on the set of product offerings that minimises the cost of satisfying different types of customers, and hence produces economies of scale and scope. Bundling also allows firms to allocate fixed costs across a broader range of products and services, helps predict buyers valuation of products more accurately, and in some cases, reduces the complexity of product lines. Bundling can therefore, lower transaction costs. 13 OECD SCIENCE, TECHNOLOGY AND INDUSTRY POLICY PAPERS

15 SECTION 2: PRICING OF TRIPLE- AND QUADRUPLE-PLAY BUNDLES Overview of market structures in OECD countries Communication bundles are typically sold with a significant price discount over stand-alone prices. Indeed, these discounts are crucial in the assessment of comparative price levels and competitive behaviour in the market, but its inclusion in the established OECD price benchmarking baskets on a permanent basis is challenging, given that communication bundles can greatly vary across the OECD area. This is why bundled prices are addressed in ad-hoc reports in order to capture these variations and explain the challenges. Recent OECD work has addressed the issue of bundling in connection with price benchmarking methodologies (OECD, 2011), where an extensive comparison was conducted for doubleand triple-play (voice, television and broadband access) services. This section of the report aims at extending this work to cover quadruple-play, adding mobile voice, SMS and data to the traditional tripleplay bundle. A significant aspect is whether bundled, and especially fixed-mobile integrated offers, are possible in a given market with a specific market structure. Of course, all fixed and mobile operators can potentially offer any of those services if they enter into an agreement with a fixed/mobile operator. There can be, however, significant transaction costs. The OECD has addressed different elements of fixed-mobile convergence (FMC) in previous reports. The most recent one focused on voice services and specific features or technological innovations such as Wi-Fi offloading and femtocells (OECD, 2011a). As a result, it is highly informative to have a general picture of whether fixed providers can, via their own Mobile Network Operator (MNO) or Mobile Virtual Network Operator (MVNO), provide mobile services to their customers, which shows whether the largest three fixed broadband providers in each OECD country could, or do actually offer mobile services (see Table 1 and Figure 1). The MNO and MVNO columns represent whether that specific operator is a mobile network or a mobile virtual network operator. The FM column shows, in April 2014, whether that operator provided some sort of integrated fixed/mobile offer. Integrated offers can take the form of an actual convergent offer of fixed and mobile services, some discounts in the mobile plan exclusive to fixed customers or vice-versa. A requirement for such an offer to qualify as quadruple-play is that some sort of benefit is provided to the customer (i.e. the customer does not only purchase both services independently from the communication provider, even though these services are provided by the same brand/company or available on the same website). In some cases, such as UPC/Cablecom in Switzerland, new fixed-mobile offers have been launched shortly after the data collection (April 2014). Out of the 104 fixed broadband operators surveyed in the 34 OECD countries (usually the telecommunication incumbent, the largest cable operator and the largest remaining broadband provider), 61 (58.6%) also have mobile operations in the form of an MNO and 17 (16.3%) of an MVNO. All the selected telecommunication incumbents in the 34 OECD countries own an MNO, except BT in the United Kingdom. Out of the 35 cable operators included in the data collection, eleven (including Telstra and Optus in Australia) also own an MNO, nine own an MVNO and most of them (fifteen) do not provide mobile services. OECD SCIENCE, TECHNOLOGY AND INDUSTRY POLICY PAPERS 14

16 Table 1. Fixed mobile integration in OECD countries Country Operator MNO MVN FM Country Operator MNO MVN FM O O Australia BigPond/Telstra YES NO YES Japan BB Excite/NTT-East YES NO NO Australia Optus YES NO YES Japan J:COM YES NO YES Australia Internode NO YES YES Japan KDDI YES NO YES Austria A1 YES NO YES Japan Softbank YES NO YES Austria Tele2 NO NO NO Korea KT YES NO YES Austria UPC NO NO NO Korea SK Broadband YES NO YES Belgium Belgacom YES NO YES Korea Tbroad NO NO NO Belgium Telenet NO YES NO Luxembourg P&T YES NO YES Belgium Snow NO NO NO Luxembourg Visual Online NO NO NO Canada Bell YES NO YES Luxembourg Numéricable NO NO NO Canada Rogers YES NO YES Mexico Telmex YES NO NO Canada Shaw NO NO NO Mexico Megacable NO NO NO Chile Movistar YES NO NO Mexico Axtel NO NO NO Chile VTR YES NO NO Netherlands KPN YES NO YES Chile Claro YES NO NO Netherlands UPC NO NO NO Czech O2 YES NO NO Netherlands Ziggo NO YES YES Republic Czech T-Mobile YES NO NO New Zealand NZ Telecom YES NO YES Republic Czech UPC NO NO NO New Zealand Call Plus NO YES NO Republic Denmark TDC YES NO YES New Zealand Vodafone YES NO YES Denmark Stofa.dk NO NO NO Norway Telenor YES NO YES Denmark Seas-nve NO NO NO Norway Get NO YES NO Estonia Elion YES NO NO Norway Lyse NO NO NO Estonia STV NO NO NO Poland Orange Polska YES NO YES Estonia Starman NO NO NO Poland Dialog NO YES YES Finland TeliaSonera YES NO NO Poland UPC NO NO YES Finland Saunalahti YES NO YES Portugal PT YES NO YES Finland DNA Welho YES NO NO Portugal NOS YES NO YES France Orange YES NO YES Portugal Vodafone YES NO YES France SFR YES NO YES Slovak Republic T-Com YES NO NO France Free YES NO YES Slovak Republic Swan/MAX Multimedia YES NO NO France Numéricable NO YES YES Slovak Republic UPC NO NO NO Germany Telekom Deutschland YES NO NO Slovenia Telekom Slovenije YES NO YES Germany Vodafone YES NO YES Slovenia Amis NO YES NO Germany Kabel Deutschland NO YES NO Slovenia T-2 YES NO YES Greece OTEnet YES NO NO Spain Telefonica YES NO YES Greece Forthnet NO NO NO Spain ONO NO YES YES Greece CYTA NO NO NO Spain Orange YES NO YES Hungary T--Home YES NO YES Sweden Telia YES NO NO Hungary GTS - Datanet NO YES YES Sweden Bredbands Bolaget YES NO NO Hungary UPC NO YES NO Sweden ComHem NO NO NO Iceland Siminn YES NO NO Switzerland Swisscom YES NO YES Iceland Vodafone YES NO NO Switzerland Sunrise YES NO YES Iceland Tal NO YES YES Switzerland UPC Cablecom NO YES NO Ireland Eircom YES NO YES United Kingdom BT NO YES NO Ireland Vodafone YES NO NO United Kingdom Sky NO NO NO Ireland UPC NO NO NO United Kingdom Virgin Media NO YES YES Israel Bezeq/Smile YES NO NO United States Verizon YES NO YES Israel Hot/Smile YES NO NO United States AT&T YES NO YES Israel Hot/010 YES NO NO United States Comcast NO NO NO Italy Telecom Italia/Alice YES NO YES Italy Fastweb NO YES YES Italy Tiscali NO YES NO 15 OECD SCIENCE, TECHNOLOGY AND INDUSTRY POLICY PAPERS

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